Blockchain explained: A practical guide from concepts to use cases

Blockchain has emerged as one of the most transformative technologies of the digital era. Initially developed to support cryptocurrency, blockchain's potential now extends far beyond finance, impacting industries like healthcare, supply chain management, and governance. This guide will walk you through the fundamentals of blockchain, explain how it works, explore its various types and components, and discuss its pivotal role in the future of the open internet.

What is blockchain?

Blockchain is a distributed digital ledger system that securely records individual transactions across a network of computers, or nodes, using cryptographic algorithms to keep data secure, transparent, and tamper-resistant. Originally developed to enable peer-to-peer transactions, blockchain has since evolved far beyond its roots. Today, it serves as the foundational technology for an expansive ecosystem of services, solutions, and platforms, reshaping how we fundamentally store and share data.

The origins of blockchain

Blockchain’s lore traces back to the pioneering work of cryptographers and cypherpunks in the late 1980s and early 1990s, including figures like David Chaum, Nick Szabo, Adam Back, and Wei Dai. This community explored digital and cryptographic currencies, developing early frameworks for decentralized systems. Blockchain became widely known in 2009 with the launch of Bitcoin, created by the pseudonymous Satoshi Nakamoto. Bitcoin addressed the "Double Spending Problem," allowing secure peer-to-peer transactions without intermediaries, establishing the foundation for decentralized digital currency.

In 2015, Vitalik Buterin launched Ethereum, introducing programmable smart contracts that expanded blockchain’s potential. Soon after, Ethereum co-founder Gavin Wood stepped away and created Polkadot, aimed at solving scalability and interoperability challenges. Launched in 2020, Polkadot's innovative architecture has broadened blockchain’s real-world applications across various sectors, including finance, gaming, governance, and more.

The ethos of blockchain and Web3

Blockchain technology is the infrastructure that enables the ideology of Web3, a decentralized version of the internet where control over data is distributed and censorship is minimized. Web3 aligns with the ideals of the open web—promoting accessibility, interoperability, and user control—it brings a unique focus on user ownership and trustless interactions through blockchain technology. In a decentralized blockchain network, decision-making and control are shared among participants rather than centralized in a single authority. This distribution of power strengthens security and transparency by reducing reliance on intermediaries.

To appreciate this shift, it helps to explore the internet's evolution from web1 to web3:

• Web1 was primarily a read-only internet, where users could access information but had limited interaction.
• Web2 introduced interactivity and social media, but also led to centralized control by major platforms like Facebook and Google, which hold vast power over user data and content.
• Web3, coined by Gavin Wood in 2014, aims to reverse this centralization trend by creating a decentralized internet where users have greater control over their data. Blockchain enables this decentralization by distributing data across multiple nodes, preventing any single entity from monopolizing information or controlling access to the web.

How does blockchain work?

As a decentralized, public ledger, a blockchain is fundamentally composed of a chain of blocks that store lists of verified transactions across a network. These transactions are validated and secured using cryptographic algorithms and consensus mechanisms. Once confirmed, each new block is linked to the previous block through a unique hash, creating an immutable record of all transactions onchain.

The fundamental structure of a blockchain is comprised of the following key elements:

• Block: Contain transaction data and are linked to previous blocks, forming a sequential chain.
• Transaction: Record data or asset transfers within the network.
• Hash: Unique cryptographic signature for each block, ensuring data integrity and linking blocks together.
• Nodes: Computers in the network that maintain copies of the blockchain and participate in validating transactions.
• Validator: A specialized type of node responsible for verifying transactions and adding blocks to the chain.

What are the benefits of blockchain?

Blockchain provides numerous benefits fueling its adoption across industries, including enhanced transparency, security, decentralization, and censorship resistance. At the core of these advantages are the principles of trustlessness and permissionlessness, which distinguish blockchain from traditional systems.

Transparency and trustless systems

The most groundbreaking attribute of blockchain is its ability to create trustless systems. In centralized systems, users rely on trusted intermediaries, like banks or governments, to manage data and transactions. Blockchain replaces intermediary trust with cryptographic proofs and consensus mechanisms, allowing users to verify transactions directly. This decentralized model increases security and transparency by giving all participants equal access to data stored on a shared ledger. Once recorded, this data cannot be altered or deleted, ensuring a tamper-proof and immutable record.

Permissionless access and openness

Blockchain networks are permissionless, meaning that anyone can participate in the network without needing approval from a central authority. While trustless systems remove the need for intermediaries, permissionless systems allow unrestricted access, making blockchain more open and inclusive. Together, these features promote a transparent, decentralized ecosystem that allows users to transact and interact without needing approval or oversight from centralized entities.

Enhanced security and data integrity

Blockchain’s security relies on cryptographic algorithms that encrypt and validate data through a network of participants. This decentralized structure minimizes single points of failure, making the network highly resilient to cyberattacks and tampering. By distributing control across nodes, blockchain ensures a level of integrity and security that centralized systems cannot easily match. Cryptographic hashing and consensus mechanisms guarantee that once data is recorded, it remains permanent, tamper-proof, and fully verifiable.

Decentralization and censorship resistance

Decentralization is another key benefit, as blockchain networks are distributed across many nodes rather than controlled by a single entity. This makes blockchain resistant to censorship and particularly valuable in regions where information flow may be controlled by central authorities, as no single party has the power to manipulate or restrict access to data on the network. However, it’s important to note that a blockchain’s resilience depends on the extent of its decentralization—not all networks are equally secure, as some rely on more centralized infrastructures.

What are the challenges of blockchain?

While blockchain offers many advantages, it also faces notable challenges, particularly scalability and speed. Decentralized networks like Bitcoin, for example, can process only a few transactions per second (TPS), making them less suited for large-scale applications compared to centralized systems like Visa, which can handle thousands of TPS. Although these limitations affect early networks, advancements in blockchain architecture—such as Polkadot’s modular architecture and layer 2 solutions like Optimism and Arbitrum—are expanding blockchain’s potential for high-transaction environments.

Environmental impact is another concern, particularly for networks that use early consensus mechanisms like Proof of Work (PoW), which require substantial computational power for mining. Fortunately, more energy-efficient consensus methods, such as Proof of Stake (PoS) and hybrid models, have been implemented to address these environmental concerns without sacrificing security.

What are the different kinds of consensus mechanisms?

Consensus mechanisms are essential for blockchain operation, providing the rules that allow a network to reach an agreement on transaction validity without relying on a central authority. These mechanisms ensure security and integrity across the decentralized network by enabling participants to verify and validate transactions.

• Proof of Work (PoW): Used by Bitcoin, PoW requires participants (miners) to solve complex mathematical puzzles to validate transactions. This method is highly secure but resource-intensive, resulting in slower processing times and significant energy consumption.
• Proof of Stake (PoS): Unlike PoW, PoS allows users to validate transactions based on the amount of cryptocurrency they stake, or lock up as collateral. Ethereum transitioned from PoW to PoS during The Merge (completed in September 2022), where validators instead of miners became responsible for securing the network.
• Proof of History (PoH): Used by Solana in combination with PoS, PoH timestamps transactions in a cryptographically verifiable order.
• Nominated Proof of Stake (NPoS): Employed by Polkadot, NPoS, a validator selection model, works in conjunction with Polkadot's hybrid consensus protocol to enhance network performance and reliability.

Each consensus mechanism offers unique trade-offs in terms of security, efficiency, and scalability, allowing blockchain networks to choose the best fit for their specific needs.

What are the different types of blockchains?

Not all blockchains are the same. There are four types of blockchains, each designed for different purposes and offering varying levels of decentralization and privacy.

• Public blockchains like Bitcoin, Ethereum, and Polkadot are fully decentralized and open to anyone to participate in and use the network.
• Private blockchains are controlled by a single organization, making them more centralized than public blockchain networks. While they still use cryptographic algorithms for security, access to the network is restricted. These are often used by businesses that need to control data privacy but still benefit from the immutability of blockchain.
• Hybrid blockchains combine elements of both public and private blockchains. For example, they allow for private, permissioned blockchains while offering the option to interact with public blockchains when needed. This flexibility makes them suitable for industries like healthcare, where some data must remain private but can be shared publicly when necessary.
• A consortium blockchain is managed by a group of organizations rather than a single entity. This model allows for decentralized control while ensuring that only trusted participants can validate transactions, making them suitable for industries requiring shared control, like supply chains.

What are the different components of a blockchain network?

Several critical components make up a blockchain network, each working to maintain the network’s integrity and functionality.

• Smart contracts: Self-executing agreements written in code on the blockchain that automatically enforce the terms of a contract when predefined conditions are met, allowing for autonomous, trustless transactions between parties without intermediaries. For example, a smart contract might be set to release payment once a service is confirmed.
• Decentralized applications (dapps): Applications built on blockchain networks. Free from centralized control, dapps rely on smart contracts to interact with the blockchain and execute transactions. Examples of popular dapps include decentralized finance (DeFi) platforms and NFT marketplaces, where users can trade, lend, borrow, or buy digital assets without intermediaries.
• Cryptocurrencies (aka crypto): A digital currency built on blockchain technology. Each cryptocurrency transaction is validated and recorded on the blockchain, providing a secure, transparent, and immutable way to transfer value between parties without the need for intermediaries like banks.
• Crypto wallets: A digital tool that allows users to manage, send, and receive onchain digital assets. Additionally, blockchain wallets serve as a gateway for interacting with decentralized applications, enabling users to engage in activities like trading, minting, and voting in blockchain ecosystems. Wallets hold a user’s public and private keys (PSA: never share your private keys or seed phrase with anyone), essential for authorizing onchain transactions.

Blockchain real-world applications and use cases

From artificial intelligence to digital art, blockchain offers versatile possibilities for potential applications in the digital age. Let’s explore some blockchain solutions across various industries.

• Finance: Crypto and digital assets are some of blockchain’s most recognized applications, facilitating the creation and exchange of digital currency and NFTs (non-fungible tokens)—unique, verifiable digital assets. This innovation has paved the way for decentralized finance (DeFi), where blockchain-based exchanges allow financial activities without traditional intermediaries like banks and financial institutions. Notable cryptocurrencies include network tokens like BTC, ETH, DOT, and SOL. Stablecoins, like USDC, USDT, and DAI, are typically pegged to fiat currencies or commodities, and backed by diversified reserves to maintain stability and reduce volatility.
• Supply chain management: Blockchain’s transparency and immutability make it ideal for tracking goods across complex logistics networks, enabling companies to verify the origin and movement of products, ensuring authenticity, and reducing fraud. For example, Heathrow Airport utilizes Polkadot’s blockchain infrastructure via Aventus to track cargo in real-time, improving data accuracy and accountability while streamlining logistical processes.
• Healthcare: Medical records can be securely stored and managed, protecting patient information by granting access only to authorized parties and preserving data integrity. For example, Novo Nordisk has integrated blockchain through its Electronic Patient Interactive Device (ePID) in clinical trials, improving data collection and security.
• Real estate: Land titles can be recorded on a tamper-proof blockchain ledger, creating a secure record of property ownership that simplifies transactions by reducing the need for intermediaries and streamlining the buying and selling process.
• Governance: Voting systems can use blockchain to offer a transparent, secure method for conducting elections and voting on referendums or proposals, minimizing fraud risk and ensuring accurate vote counting. Polkadot’s OpenGov is a prime example of onchain governance in action, enabling participants to propose and vote on network changes directly. Decisions are implemented automatically, ensuring a trustless, decentralized governance process.

Blockchain architecture: monolithic vs. modular

Blockchain networks vary significantly in their architectural designs, impacting scalability, adaptability, and the range of applications they can support. Broadly, these designs are categorized as monolithic or modular, and understanding their differences becomes easier when we examine architecture through the concept of layers, or distinct levels of functionality or core functions within the network.

Monolithic blockchains

Traditional monolithic blockchains operate within a single layer 1 structure where all core functions—execution, consensus, data availability, and settlement—are handled within one unified layer. While monolithic chains are secure and decentralized, their limited scalability makes it challenging to support high-demand applications, which can slow down the network as it grows.

Monolithic blockchains have been able to overcome issues such as scalability through advancements in layer 2 and layer 3 solutions. Below are the different types of blockchains categorized by the layer solution they provide.

• Layer 0 (Network layer): Known as the “meta-protocol layer,” layer 0 blockchains, like Polkadot, serve as the foundational level where interoperability and connectivity between different blockchains occur. This layer acts as the connective tissue that allows layer 1 blockchains, such as independent chains on Polkadot, to communicate cross-chain, enabling a network of interconnected chains.
• Layer 1 (Base layer): Layer 1 is the foundational blockchain layer where the main protocol operates, including transaction processing, consensus, data availability, and settlement. Traditional blockchains like Bitcoin and Ethereum are monolithic layer 1 chains, where all core functions operate within a single layer. In modular designs, layer 1 chains often delegate specific tasks to other layers to increase scalability and performance.
• Layer 2 (Scaling solutions): Layer 2 refers to protocols built on top of layer 1 to enhance scalability and speed. Solutions like the Lightning Network for Bitcoin or Optimistic rollups for Ethereum offload transaction processing to reduce congestion on the main layer 1 chain.
• Layer 3 (Application layer): Layer 3 provides application-specific environments, sometimes called appchains, designed to serve the specific needs of particular decentralized applications (dapps). This layer offers interoperability and customizability, enabling developers to control key aspects like block size, transaction speed, and governance, compared to the limitations of general-purpose blockchains.

Modular blockchains

In contrast to monolithic chains, modular blockchains, like Polkadot and Cosmos, distribute core functions into specialized layers, enhancing scalability, flexibility, and efficiency. The main functional layers include:

• Execution: Responsible for processing transactions and executing smart contracts. This layer handles the actual computation involved in transactions.
• Settlement: Finalizes transactions and ensures their validity. It verifies proofs from execution layers and manages disputes.
• Consensus: Achieves agreement among network participants on the order of transactions and the chain’s state.
• Data availability: Ensures that transaction data is accessible and verifiable by all participants, allowing for efficient transaction validation without overloading any single layer.

The future of blockchain is already here

Blockchain represents a monumental shift in how we store, manage, and interact with data. By decentralizing control, enhancing transparency, and providing a secure infrastructure, blockchain is revolutionizing industries and supporting the development of web3—the next iteration of the internet. As the technology matures, its potential will continue to grow, empowering individuals and organizations to take control of their digital interactions.

While challenges like scalability and adoption remain, innovations like Polkadot’s modular architecture and the suite of features of Polkadot 2.0, like Agile Coretime, are making scalability and cross-chain communication practical solutions for real-world deployment.

The next wave of blockchain adoption is happening now. Developers are building more consumer applications, businesses are discovering tangible value, and users are experiencing better UX with their blockchain interactions. Want to be part of building this future? Start exploring Polkadot's ecosystem today.

FAQ

What is the difference between blockchain and cryptocurrency?

Blockchain is the underlying technology—a decentralized, immutable ledger that records data across a network. Cryptocurrency, on the other hand, is one application of blockchain, representing decentralized digital assets or currency that can be created, transferred, and stored onchain. Essentially, blockchain provides the infrastructure, while cryptocurrency serves as one of its many use cases.

What is the difference between blockchain and Bitcoin?

Blockchain is a technology that enables secure, decentralized record-keeping across a network. Bitcoin is the first and most well-known application of blockchain, specifically designed as a peer-to-peer digital currency.

Are all blockchain ecosystems open source?

Not all blockchain ecosystems are open source, though many are. Open-source blockchain projects allow community members to inspect, contribute to, and build upon the code, fostering transparency and collaboration. However, some blockchains may choose to keep certain code proprietary, especially in private or permissioned ecosystems.

Is Polkadot open source?

Yes, Polkadot is open source. Polkadot’s code is accessible to the public, allowing anyone to contribute to the network, audit the code, and build upon it, promoting transparency and fostering innovation within the Polkadot ecosystem.

What is the difference between blockchain and traditional databases?

Traditional databases are centralized, with data stored in one location and managed by a trusted central authority, which is responsible for validating and securing data. Blockchain, however, is a decentralized, trustless system that uses consensus mechanisms that enable network participants to verify data independently.

What is the difference between blockchain and Distributed Ledger Technology (DLT)?

Blockchain is a subset of Distributed Ledger Technology (DLT), which refers to systems where data is distributed across multiple locations. Unlike some DLTs, blockchain is designed to operate without central authority, ensuring decentralization and data immutability through cryptographic algorithms and consensus.